State of Kerala vs K.S. Distillery

A.K. Basheer, J.—These three appeals are being disposed of by this common judgment since a common issue is involved in all of them.

The short question that arises for consideration is whether the State can levy excise duty on rectified spirit which is not fit for human consumption.

In Writ Petition No. 32187/2005, which is the subject matter of W.A. No. 71/2008, a learned Single Judge of this Court answered the above question in the negative and held that Rule 55(4) of the Kerala Distillery & Warehouse Rules 1968 is ultra vires and unenforceable in so far as it deals with levy of duty "on wastage exceeding 0.5%". Later, the above decision was followed in two other Writ Petitions, which are impugned in the other two Writ Appeals.

Before we refer to Rule 55(4) of the Kerala Distillery & Warehouse Rules 1968, it may be profitable to take a look at Chapter 5 of Abkari Act which deals with duties, taxes and rentals. For the sake of convenience, relevant clauses of Sections 17 and 18 of the Act (unamended) are extracted hereunder:

Section 17: Duty on liquor or intoxicating drugs:- A duty of excise or luxury tax or both shall, if the Government so direct, be levied on all liquor and intoxicating drugs--

(a) permitted to be imported u/s 6; or

(b) permitted to be exported u/s 7; or

(c) permitted u/s 11 to be transported or

(d) manufactured under any licence granted u/s 12; or

(e) manufactured at any distillery, brewery, winery or other manufactory established u/s 14; or

(f) issued from a distillery, brewery, winery or other manufactory or warehouse licenced or established u/s 12 or Section 14; or

(g) sold in any part of the State:

Provided that no duty or gallonage fee or vend fee or other taxes shall be levied under this Act on rectified spirit including absolute alcohol which is not intended to be used for the manufacture of potable liquor meant for human consumption.

Explanation: For the purposes of this and Section 18, the expression "duty of excise", with reference to liquor or intoxicating drugs, include countervailing duty on such goods manufactured or produced elsewhere in India and brought into the State.

Section 18 - How duty may be imposed:

1) Such duty of excise may be levied:

(a) in the case of spirits or beer, either on the quantity produced in or passed out of a distillery, brewery or warehouse licensed or established u/s 12 or Section 14 as the case may be or in accordance with such scale of equivalents, calculated on the quantity of materials used or by the degree of attenuation of the wash or wort, or on the value of the liquor as the case may be, as the Government may prescribe:

(b) in the case of intoxicating drugs on the quantity produced or manufactured or issued from a warehouse licensed or established u/s 14;

(c) Omitted by Section 6(1)(iv) of Presidents Act 1 of 1964.

(d) Omitted by Section 6(1)(iv) of Presidents Act 1 of 1964.

(e) in the case of toddy, or spirits manufactured from toddy, in the form of a tax on each tree from which toddy is drawn, to be paid in such instalments and for such period as the Government may direct; or

(f) by import, export or transport duties assessed in such manner as the Government may direct.

A perusal of the above provisions will unambiguously show that (the power of the State to levy duty is confined only to potable liquor and not raw spirit that is used in the manufacture of potable liquor. But it is contended by the learned Senior Government Pleader that there is no provision under the Abkari Act which prohibits levy of duty on spirit or Extra Neutral Alcohol which is used for manufacture of potable liquor. He further contends that spirit or Extra Neutral Alcohol is liquor as per Sub-section (9) and (10) of Section 3 of the Act, for the import of which duty is leviable u/s 17 of the Act.

Rule 55 of the Kerala Distillery & Warehouse Rules 1968 reads thus:

Rule 55: Allowances for wastage:

(1) An allowance made for the loss in transit by leakage or evaporation or other unavoidable causes of spirits imported or transported under bond in wooden casks or receptacles shall be at the rate of 1% for a journey every of 400 k.m. or part there of subject to a maximum of 4% for the whole journey.

(2) If the spirits are imported or transported in metalic receptacles, tanker lorries or plastic/polythene containers, the allowance made for loss in transit by leakage and evaporation or other unavoidable causes shall be at the rate of 0.1% for a journey of every 400 k.m. or part there of subject to a maximum of 0.5% for the whole journey:

Provided that if the actual loss is less than the loss as computed under Sub-rule (1) or (2) allowance shall be made only for the actual loss.

(3) The allowance to be made under this rule shall be determined by deduction from the quantity of spirit despatched from the distillery or warehouse, the quantity received at the place of destination, both quantities being stated in terms of London Proof Litres and shall be calculated on the quantity contained in each consignment.

(4) If the report of the officer by whom a consignment of spirit transported or exported has been gauged and proved on arrival at its destination shows that loss has occurred in transit to a greater extent than that prescribed by Sub-rules 1 to 3 the distiller or warehouse keeper shall pay duty at the tariff rate, for the time being in force, on so much of the deficiency as is excess of the allowance so prescribed:

Provided that if proved to the satisfaction of the Commissioner that such deficiency could not have prevented by the exercise of proper care and precaution, and that the spirits could not have passed into consumption, the duty levied on such deficiency shall be refunded. The Commissioner''s decision shall be final.

Sub-rule (2) with which is relevant in these cases, gives an allowance to the extent of 0.5% as wastage if the spirits are imported or transported in metal receptacles, tanker lorries or plastic/polythene containers. The allowance that is permissible for loss in transit or other shall be at the rate of 0.1 % for a journey of every 400 k.m. or part thereof subject to a maximum of 0.5% for the whole journey.

Sub-rule (4) empowers the officer to levy duty at the tariff rate on the spirit transported or exported, if he satisfies that the loss has occurred in transit to a greater extent than that prescribed by Sub-rules (1) to (3). However, the proviso further empowers the Commissioner to refund the duty levied from the consignor, if he satisfies that such deficiency could not have been prevented by the exercise of proper care and precaution.

In the cases on hand, the respondents were levied with excise duty since it was found that the wastage was above the permissible limit of 0.5%. Accordingly, demand notices were issued. It was at that stage that respondents had approached this Court challenging the vires and constitutionality of the levying provision referred to above.

As mentioned earlier, the learned Single Judge in W.P.(C) No. 32187/2005, which is the subject matter of W.A. No. 71/2008, held that the levy was illegal and unsustainable. It was further declared that Sub-rule (4) of Rule 55 is ultra vires the Constitution. The learned Single Judge primarily relied on the decision of the Apex Court in State of U.P. and Others Vs. Modi Distillery and Others, and also on a decision of the Full Bench of this Court in State of Kerala v. Ajit Kumar ILR 1994 Ker. 759.

Sri Vinod Chandran, learned Senior Government Pleader, while assailing the above view taken by the learned Single Judge submits that the fact that rectified spirit which by itself may not be potable, can be converted as potable liquor by adding water to it, has been overlooked by the learned Single Judge. If such conversion can be easily achieved, there is no rationale in taking the view that no duty can be levied on the Extra Neutral Alcohol which is otherwise known as rectified spirit. Duty is being levied only if the wastage is found in excess of the permissible limit of 0.5%. It is pointed out by the learned Senior Government Pleader that the possibility of importers/manufacturers diverting the spirit for illegal purposes cannot be ruled out at all. Loss of revenue to the State, has to be prevented at any cost, he contends. He submits that this aspect was not considered at all, by the learned Single Judge while deciding Writ Petition No. 32187/2005. It is further contended by the learned Senior Government Pleader that the above view has been followed in the two subsequent cases without any application of mind. In this context learned Senior Government Pleader has also invited our attention to the decision of their Lordships of the Supreme Court in Vam Organic Chemicals Ltd. and Another Vs. State of U.P. and Others, . He tries to justify the levy of duty on the plea that it is only in the nature of a regulatory fee, which the State is always competent to impose in public interest and also in the interest of the revenue of the State.

However, learned Counsel for the respondents have invited our attention to the decision of the Apex Court in Synthetics and Chemicals Ltd. and Others Vs. State of U.P. and Others, and in Deccan Sugar and Abkari Co. Ltd. v. Commissioner of Excise (2004) 1 SCC 243 etc. In the latter decision, it has been held thus:

It is settled by the decision of this Court in Synthetics and Chemicals Ltd. and Others Vs. State of U.P. and Others, that the State Legislature has no jurisdiction to levy any excise duty on rectified spirit. The State can levy excise duty only on potable liquor fit for human consumption and as rectified spirit does not fall under that category, the State Legislature cannot impose any excise duty. The decision in Synthetics and Chemicals Ltd. and Others Vs. State of U.P. and Others, has been followed in State of U.P. and Others Vs. Modi Distillery and Others, where certain wastage of ethyl alcohol was sought to be taxed. This Court following the decision in Synthetics and Chemicals Ltd. and Others Vs. State of U.P. and Others, came to the conclusion that this cannot be done.

In view of the above settled position of law, we do not deem it necessary to labour much on the point which is covered against the appellants. Therefore, these appeals are only to be dismissed. We do so. However, we hasten to add that the safeguards available to the State as indicated in the judgment of the learned Single Judge are not being disturbed by us.

Sri K.P. Dandapani, learned Senior counsel appearing for the respondent in W.A. No. 43/2008 points out that the amount demanded from the respondents was deposited under protest as revealed from Exts.P8 and P8(a).

It necessarily follows that the amount, if any, paid by the respondent in W.A. No. 43/2008 shall be refunded to him without any further delay, at any rate within two months from the date of receipt of a copy of this judgment.